This word has two meanings—that of utility, and that of pur chasing power; the one may be called value in use, the other value in exchange. Merely mentioning the former, Smith goes on to study the latter, and endeavours to find a measure of value, and the forces regulating exchange value. He maintains that labour is the real measure of the exchangeable value of all com modities. "Equal quantities of labour at all times and places, are of equal value to the labourer." "Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only." Money, however, is in men's actual transactions the measure of value, as well as the vehicle of exchange; and the precious metals are best suited for this func tion, as varying little in their own value for periods of moderate length; for distant times, corn is a better standard of comparison. In relation to the earliest social stage, we need consider nothing but the amount of labour employed in the production of an article as determining its exchange value; but in more advanced periods price is complex, and consists in the most general case of three elements—wages, profit and rent. Wages are the reward of labour. Profit arises as soon as stock, being accumulated in the hands of one person, is employed by him in setting others to work, and supplying them with materials and subsistence, in order to make a gain by what they produce. Rent arises as soon as the land of a country has all become private property.
Smith then discusses the three elements of rent, wages and profits in detail. He goes on to point out that, as they are the elements of price, so they are the constituents of income ; and the three great orders of every civilized society, from whose revenues that of every other order is ultimately derived, are the landlords, the labourers and the capitalists. The relation of the interests of these three classes to those of society at large is different. The interest of the landlord always coincides with the general interest : whatever promotes or obstructs the one has the same effect on the other. So does that of the labourer. But "the interest of the third order has not the same connection with the general interest of the society as that of the other two ; . . . it is always in some respects different from and opposite to that of the public." Capital.—The subject of the second book is "the nature, accumulation and improvement of stock." A man's whole stock consists of two portions—that which is reserved for his immediate consumption, and that which is employed so as to yield a revenue to its owner. This latter, which is his "capital," is divisible into the two classes of "fixed" and "circulating." The first is such as yields a profit without passing into other hands. The second consists of such goods, raised, manufactured or purchased, as are sold for a profit and replaced by other goods; this sort of capital is there fore constantly going from and returning to the hands of its owner.
The whole capital of a society falls under the same two heads. Its fixed capital consists chiefly of (I) machines,• (2) buildings which are the means of procuring a revenue, (3) agricultural im provements and (4) the acquired and useful abilities of all mem bers of the society (since sometimes known as "personal capital"). Its circulating capital is also composed of four parts—(i) money, (2) provisions in the hands of dealers, (3) materials and (4) completed work in the hands of the manufacturer or merchant. Next comes the distinction of the gross national revenue from the net—the first being the whole produce of the land and labour of a country, the second what remains after deducting the expense of maintaining the fixed capital of the country and that part of its circulating capital which consists of money.
Smith explains the gain to the community arising from the sub stitution of paper money for that composed of the precious metals; and here occurs the remarkable illustration in which the use of gold and silver money is compared to a highway on the ground, that of paper money to a wagon way through the air. In pro ceeding to consider the accumulation of capital, he is led to the distinction between productive and unproductive labour. A broad line of demarcation is drawn between the labour which results in commodities or increased value of commodities, and that which renders services : the former is productive, the latter unproductive. "Productive" is by no means equivalent to "useful": the labours of the magistrate, the soldier, the churchman, lawyer and phy sician, are, in Smith's sense, unproductive. Productive labourers alone are employed out of capital; unproductive labourers, as well as those who do not labour at all, are all maintained by revenue. In advancing industrial communities, the portion of annual pro duce set apart as capital bears an increasing proportion to that which is immediately destined to constitute a revenue, either as rent or as profit. What is annually saved is as regularly con sumed as what is spent, but by a different set of persons, by productive labourers instead of idlers or unproductive labourers; and the former reproduce with a profit the value of their con sumption. The only mode of increasing the annual produce of the land and labour is to increase either the number of productive labourers or the productive powers of those labourers. With regard to price paid for the use of capital Smith says : "In some countries the interest of money has been prohibited by law. But, as something can everywhere be made by the use of money, some thing ought everywhere to be paid for the use of it," and will in fact be paid for it ; and the prohibition will only heighten the evil of usury by increasing the risk to the lender.